Key facts
- ECB expected to hold deposit rate at 2.50% on Oct. 29.
- 90% of economists polled expect a 25 basis point rate hike in December.
- September inflation was 3.8%, nearly double the ECB's 2% target.
- Inflation forecast for this quarter upgraded to 3.7% from 3.3%.
- Euro zone growth outlook for this year revised up to 1.0% from 0.8%.
The European Central Bank is likely to maintain its deposit rate at 2.50% in its upcoming October meeting, but a significant majority of economists now anticipate a 25 basis point increase in December as inflation remains elevated. A Reuters poll conducted from October 5-8 found that 70 out of 73 economists expected the ECB to hold rates steady on October 29, aligning with market pricing. However, a strong reversal from previous surveys shows 64 of 73 economists forecasting another rate hike in December.
Inflation in September stood at 3.8%, nearly double the ECB's 2% target, and is projected to average 3.7% this quarter, an upward revision from last month's forecast. This comes as global government bond yields have risen sharply due to higher inflation expectations and fiscal concerns, particularly in France. Policymakers are navigating a delicate balance between controlling inflation and supporting economic growth, with ECB President Christine Lagarde advocating for a "measured response."
While rising energy prices stemming from the conflict between the US and Iran have not yet significantly spilled into broader consumer prices, the ECB faces pressure to act. Some economists, like Jens Eisenschmidt, chief Europe economist at Morgan Stanley, believe the ECB will continue its quarterly adjustment path, leading to another hike in December, and possibly even one more in March. The peak deposit rate is now expected by a majority of 58% of economists to be 2.75%, a notable increase from just two expecting that level last month, with 24 economists anticipating a 3.00% peak.
Despite the hawkish shift in expectations, some argue against an immediate October hike. Anatoli Annenkov, senior European economist at Societe Generale, noted that rising market rates are already performing some of the ECB's work. The economic outlook for the euro zone has also seen an upward revision, with growth now expected to expand by 1.0% this year, up from 0.8% in the previous survey.